US embassy cable - 04YEREVAN2505

C O N F I D E N T I A L YEREVAN 002505 
 
SIPDIS 
 
STATE FOR EUR/CACEN SIDEREAS, EUR/ACE FOR LONGI, EB/CIP, 
PLEASE PASS USTR FOR KULHMANN 
 
E.O. 12958: DECL: 11/19/2014 
TAGS: ECON, EINV, KPRV, BEXP, PREL, AM 
SUBJECT: GOAM TELECOM DEAL SUBSIDIZES N-K PHONE NETWORK 
 
REF: YEREVAN 2470 
 
Classified By: DCM A.F. GODFREY FOR REASONS 1.4 B AND D 
 
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SUMMARY 
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1.  (C) On November 19 the Armenian Government published the 
details of a second mobile license that it granted to 
Karabakh-Telecom during a six hour tender process during the 
night of November 4 (Reftel).  The government granted the 
license rights very cheaply, with no investment commitment 
inside Armenia, but, curiously, an investment commitment 
inside Nagorno-Karabakh.  The terms of the deal show that 
although the GOAM claimed it sought to end Armentel's 
monopoly in order to improve phone service in Armenia, they 
used the opportunity of a second license to subsidize 
telephone service in Nagorno-Karabakh.  End Summary. 
 
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GOOD DEAL FOR K-TELECOM 
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2.  (SBU)  According to information published on a GOAM 
website, Karabakh-Telecom, the Lebanese firm that was 
selected as Armenia's second mobile phone operator paid only 
USD 7 million for the license.  Of that seven million, it 
must pay USD 5 million to the GOAM over the next four years, 
and USD 2 million to the All-Armenian Hayastan Fund, a 
Diaspora-funded private charity whose mission is to build up 
Nagorno-Karabakh.  In a break with expectations and practice, 
the GOAM did not specify a minimum investment level for 
K-Telecom in Armenia, but did call for an additional USD 10 
million investment in Nagorno-Karabakh's telephone network, 
which it has run since 2001.  (Comment:  The investment 
commitment for mobile service in Armenia is likely 
unnecessary, as investment will be in the company's interest. 
 The commitment for Karabakh is necessary to compel K-Telecom 
to continue investment in its unprofitable fixed line service 
there.  End Comment.) 
 
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GOAM MADE DEAL TO PROTECT KARABAKH'S TELEPHONE NETWORK 
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3. (C) The Lebanese Ambassador to Armenia told the Ambassador 
November 16 that the owner of K-Telecom,  Pierre Fatouch was 
a personal friend.  Fatouch is a wealthy Christian Lebanese 
with no particular Armenian connection except that he is 
friendly with both President Kocharian and Defense Minister 
Sargsian.  According to the Lebanese Ambassador, Fatouch has 
lost upwards of fifteen million investing in Nagorno-Karabakh 
telecommunications and told the Armenians that he would have 
to pull out of Nagorno-Karabagh unless there was something 
for him in Armenia proper.  As noted in Reftel, Azerbaijan is 
pressuring international bodies regulating telecommunications 
and private telecom companies to exclude K-Telecom from 
roaming agreements.  The Lebanese Ambassador said that 
President Kocharian, Defense Minister Sargsian and the 
government of Armenia basically "gave" the license to 
Fatouch, expecting that he would bring down rates for 
Armenian users.  He has also been asked to look at water and 
electricity in Nagorno-Karabakh. 
 
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ARMENIA'S MOBILE USERS TO SUBSIDIZE KARABAKH PHONE SYSTEM 
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4. (C)  COMMENT:  Under the Armentel Monopoly, profitable 
mobile service subsidized unprofitable fixed line service in 
Armenia.  Now, a second mobile service in Armenia will 
subsidize unprofitable fixed line service in 
Nagorno-Karabakh.  The deal to end Armentel's monopoly was an 
opportunity to pursue the GOAM's stated goal of moving to a 
more liberalized telecommunications sector where relative 
prices  of fixed and mobile services would reflect relative 
costs and competition could be less restricted.  With this 
deal the GOAM scotched that opportunity and took a step 
backwards.  Because K-Telecom is counting on its profits in 
Armenia to compensate for losses in Karabakh, it is unlikely 
that the deal will bring down Armentel's high prices. 
Because Armentel is already oversubscribed, creating a black 
market for new SIM cards, K-Telecom can easily absorb excess 
demand without improving services or reducing prices. 
EVANS